Recent tax withholding legislation has created onerous duties on securities issuers. For example, the kingdom of Spain passed a law on Jul. 4, 2003 entitled Law 19/2003. Law 19/2003 requires issuers of interest-bearing and preferred equity securities in Spain who wish to sell their securities to investors outside of Spain (without the income from such securities becoming subject to Spanish withholding tax) to collect certain information on the identity and tax status of every investor, prior to such investor being paid income on such securities without the application of such tax. Such investor information must be collected together with corresponding government-designed tax certificates containing information about the investor, the tax status of the investor, the income that the investor is to receive, and whether or not tax will be withheld from the payment of income to said investor. Such tax certificates must be generated and certify the accuracy of the corresponding investor information, and must be executed by officials of the banks or other securities intermediaries through which investors hold their securities. According to Law 19/2003, each issuer must compile this investor information in relation to all of the investors of a particular security, as well as receive and review all corresponding executed tax certificates, before any payment of income to the investors of said security without the application of withholding tax. Because such securities generally pay interest or dividends bi-annually or quadra-annually, and due to the fact that the investor base for such securities is always changing, and can certainly change significantly over a period of several months, the entire process of collecting information and executed tax certificates must be completed at the time of each and every payment of income with respect to the securities in question. This creates a data collection, verification, processing and reporting burden for any such issuer.
Law 19/2003 allows for certain investors who are exempt from Spanish Non-Resident Withholding Tax to be paid their income in full, without any withholding tax, provided that their identifying information, including country of residence, and the details of the income to which they are entitled, have been properly provided by the relevant bank or intermediary through which the securities are held, legally certifying that such information is all factual and accurate.
On the other hand, should an investor not be exempt from Spanish Non-Resident Withholding Tax, the withholding tax (currently 18% of such income) will be deducted from the income paid to said investor on the payment date. Should the issuer not manage to collect investor information, tax status information and a executed tax certificate on behalf of any such investor prior to the payment of income, Law 19/2003 requires that the issuer collect the appropriate amount of withholding tax against any payment of income due such investors, and promptly remit such amount to the Spanish government.
Moreover, there are severe penalties for an issuer's noncompliance with these requirements. Such penalties can include extremely costly fines and penalties that are levied by the Spanish tax authorities (i.e., the Agencia Estatal de Administración Tributaria, or “AEAT”) that can amount to 50% of the total amount of income paid to all investors of the securities in question.
Law 19/2003 effectively requires that for any interest-bearing and preferred equity security issued or guaranteed by a Spanish entity and sold to investors outside of Spain, prior to the issuer paying any interest or preferred dividends without applying the collection of withholding tax, (on whatever periodic basis such payments are to be made), the issuer must locate and interact with every bank and intermediary institution through which investors hold such security and request that such banks and intermediaries create, populate and physically sign paper-based tax certificates. The required tax certificates contain (i) the identity of the investors holding securities through them, (ii) the residence such investors, and (iii) the amount of income to be paid to such investors, (with or without subtracting the appropriate taxes) which is commonly based on fixed or variable rates. If variable, the rates are set on a periodic basis close to the date of payment, and this often involves difficult mathematical calculations for each investor. Further, a representative of each such bank or intermediary institution is required to review and sign all such certificates to certify on behalf of their institution that all of the information contained in such tax certificates is completely true and accurate, and mail or hand-deliver the certificates to the issuer. Due to the free-form nature of these tax certificates, the relative complexity of the certificates and the information contained within them, and their multilingual nature, the tax certificates received and processed under Law 19/2003 were often incorrect, improperly formatted, or otherwise not in compliance with the legal specifications for tax certificates mandated by it.
The certificates are generally required to be delivered to the issuer a certain number of business days prior to the actual coupon payment date for such securities in order to help offset the time required by the issuer to manually process such tax certificates and investor information. The issuer then needs to organize the tax certificates according to the security to which they relate and the specific payment of income for each such security, and then hand re-key-enter the investor identity, tax status information, and income amount, and organize that data into a format from which the issuer could later produce an annual tax reporting filing to AEAT (called a modelo 198, 193 or 296, each containing records of payments to different types of investors). The issuer would then need to determine the validity of the tax certificates and corresponding information received and direct that income be paid to some investors and some banks and intermediaries at the tax-exempt rate of 0% withholding, or the tax-withheld rate of 18% of total income received. Each such bank or institution would need to receive an aggregate amount of income resulting from the combined taxable or tax-exempt status of all the underlying investors holding through such bank or intermediary institution, and such bank or intermediary institution would have to then determine how to allocate the income among their underlying investors as the total amount received would not be sufficient to credit each investor their income free from withholding tax. Due to the complexity and operational burden these requirements represented for both the issuers and the banks and intermediaries, issuers would often initially withhold tax from all investors on the scheduled income payment dates to allow themselves several days to sort through the stacks of paperwork and determine which investors were unfairly taxed and issue refunds of the withheld amounts to any such investors. Such delay in delivery of the withheld income resulted in costs to investors in lost revenues that such monies could have otherwise generated. Nonetheless, issuers felt that they had no choice due to the intense manual data compiling and checking processes required, and the need to avoid incurring the penalties associated with non-compliance with the law.
In addition to the above described direct effects upon issuers, the labor intensive processes of compiling investor information and hand-generating, via word processor, corresponding tax certificates on behalf of each and every individual investor (of which there could be thousands per security per payment), required to be carried out by the tax operations departments of the banks and brokerage firms through which investors would obtain such Spanish securities, and which further would have to be carried out by such banks or brokerage firms several times each year, was deemed by many banks and brokerage firms to be an unacceptable operational burden. Thus, many banks and brokerage firms either refused to allow such securities to be purchased through them, or refused to cooperate with the requirements of Law 19/2003 and therefore prevented investors holding such securities through them from being paid the full income to which they were entitled, regardless of whether or not they were actually exempt from such tax. The net effect of this marketplace reaction in the countries, specifically the United States, where Spanish issuers would seek to issue securities to be sold to and purchased by US investors, was that due to such refusal of many bank and brokerage firms to act as outlets for the distribution of such securities into the hands of investors the market for such securities, despite high investor demand for the securities themselves, was artificially limited, reducing the financial viability of the securities to be issued.
Furthermore, were any such securities actually issued and sold to investors through the remaining limited channels comprised by the minority of financial institutions willing to accept the securities, the refusal or inability of this minority of banks and brokerage firms to comply with the requirements of Spanish Law 19/2003 resulted in many such investors being taxed at 18% on any income to which they would be entitled, thereby significantly reducing the effective interest rate of the securities, affecting the realized market value of such securities adjusted to reflect this effectively lower interest rate, and thereby further tarnishing the marketability of the securities. The effective outcome of this situation was that from the time that Law 19/2003 was enabled essentially no Spanish securities subject to the law were issued into the US market. This created an artificial vacuum of Spanish securities in the US dollar-denominated securities inventory and a corresponding hardship for Spanish corporate issuers who were effectively cut-off from a major and important capital base. In turn, this affected the cost to those issuers of raising the capital required to operate and maintain their businesses and potentially could have secondary effects on the Spanish economy and any other capital markets to which such Spanish corporations would need to turn to satisfy their capital requirements.
Many countries around the world have followed Spain's lead and adopted equivalent legislation to Law 19/2003 with similar effects on each such country's domestic securities issuers. Many such markets, including but not limited to Portugal, Lebanon, Mexico, Iceland and Italy suffer from similar if not identical operational obstacles to raising foreign capital due to legal requirements for tax certification and reporting that are substantially similar to those of Spanish Law 19/2003 described above. It is estimated that the unrealized market in Spanish US Dollar denominated securities under Spanish Law 19/2003 without a solution such as is provided by the present invention would be approximately $180 Billion. It is further estimated that the unrealized market in US Dollar denominated securities issued from all of the countries that have enacted similar legislation to be on the scale of $600-800 Billion.
What is thus needed in the art is a system and method that can overcome the operational inefficiencies and mechanical impediments inherent in compliance with investor information reporting and tax certification requirements imposed by legislation and/or regulation such as Spanish Law 19/2003 and similar laws and requirements in other jurisdictions. What is further needed in the art is a system and method which facilitates such compliance in an effective and efficient way.